The new bankruptcy laws passed in 2005 placed restrictions on individuals seeking to file under Chapter 7 of the U.S. Bankruptcy Code. In essence, an individual who is in a financial position to repay even a portion of his or her debt must file under Chapter 13 rather than under Chapter 7. As a consequence, more consumers are seeking ways to avoid filing for debt relief altogether.
Even those for whom Chapter 7 is still an option (i.e., people who can "pass" the bankruptcy means test), filing for debt relief may not be the ideal choice.
- Bankruptcy can be a complex and stressful process.
- Filing is a matter of public record in which all of one's financial dealings will be exposed.
- Chapter 7 amounts to giving up all of one's nonexempt property to be liquidated for the payment of debts.
- Chapter 13 is a more drawn-out process (three to five years) during which one's financial life is strictly supervised by the bankruptcy trustee.
- A bankruptcy can remain on one's credit record for up to 10 years.
- Having a bankruptcy in the past may impact one's job prospects in certain fields.
Negotiate with Creditors as an Alternative
It is possible to avoid filing for debt relief by negotiating one's own debt settlement plan with creditors over the telephone. Doing so may take time and patience, but the outcome could be more favorable payment terms, including reduced interest rates or a forgiveness of part of the debt. Anyone negotiating with creditors should:
- Collect and carefully review all paperwork related to the debts ahead of time.
- Have in mind a reasonable proposal for repaying the debts.
- Tell the creditors up front the reason for the call, and ask to speak to a supervisor or department manager.
- Be professional and polite.
- Keep careful records of the telephone calls, including the name of anyone spoken to, the date and time of the call, and the substance of the discussion.
- Avoid taking on any additional debt until the existing debts are paid off.
Use Debt Consolidation to Avoid Bankruptcy
The goal of debt consolidation is to reduce all of one's debts to one payment, and then pay off that debt. Debt consolidation can be accomplished a couple of different ways. One may choose a do-it-yourself method which might involve, for example, taking out a second mortgage on one's home in order to pay off other debts.
The second mortgage would be a form of debt consolidation loan. Again, it is critical to avoid taking on any new debts until the loan is repaid.
Another alternative to bankruptcy is the use of a debt consolidation service. According to Stephen P. Parsons, author of The ABCs of Debt, debt consolidation services may take on the task of negotiating agreements on the consumer's behalf by which creditors agree to take partial payments in full satisfaction of the debts, or agree to give the consumer additional time to make payments on the debts.
According to Parsons, the debt consolidation service may take an assignment of the consumer's wages and make payments to the creditors directly on behalf of the consumer. The agreement between the consumer and the debt consolidation service may involve the consumer giving up all credit and debit cards and agreeing not to incur any new debt without the company's approval.
Additional Resource: The Fair Debt Collection Practices Act
Source: Parsons, Stephen P. The ABCs of Debt. N.Y.: Aspen, 2009.
Disclaimer: This article is in no way intended as legal or financial advice. For help with specific legal or financial issues, one should contact an attorney or financial professional in one's local area.
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